When buying a home, the settlement process can be confusing. Not to mention the trepidation that comes from signing all those forms.
An additional layer has been creeping into the process, most often in Virginia. Some say it provides extra protection and convenience for the seller. Others claim it causes delays and raises costs.
The practice is known as split closing or split settlement where the buyer and the seller each use a title company for a single transaction. This is not the same as when the buyer and seller sign the documents at different times, which happens frequently these days. In a split closing, the seller hires a title company separate from the buyer’s title company to complete the sale.
Every state has different customs or practices when it comes to real estate transactions. While title companies handle closings in the District, Maryland and Virginia as well as the lower eastern half of the country and the Midwest, New England states require the buyer and the seller each have an attorney represent them at settlement. Escrow companies manage closings on the West Coast.
Under Section 9 of the Real Estate Settlement Procedures Act, sellers are prohibited from dictating the title company used at a closing. Buyers select the company that ensures the title to the property is clean and issues title insurance.
“The public needs to realize the buyer chooses the title company,” said Lorraine Arora, managing broker at Weichert Realtors Fair Oaks.
Even though it’s the buyer’s choice, the title company has a responsibility to make sure the buyer’s mortgagee is satisfied above all.
“You’re representing the transaction,” said Timothy Mullin, managing member and co-founder of Counselors Title. “You are beholden to any instructions from the lender in a transaction.”
Because they don’t get to choose which title company is at the table, some sellers may feel their interests aren’t being protected.
“Even though [the seller] might be paying for that title insurance policy, they cannot tell the buyer who they have to use,” said Linda J. H. Aparo, national director of sales and marketing for reQuire Real Estate Solutions. “That’s why sometimes in split closings the seller gets their own title company because they’re like, ‘I want to depend on my own person. I don’t know that guy.’ But they are really performing the same task. You’re just paying for it twice.”
Neither the American Land Title Association, an industry group, nor the Virginia Bureau of Insurance, which enforces the laws and regulations relating to title settlement agents in the state, has taken a position on split closings.
Convenience is one of the reasons sellers opt to use a separate title company. If they are selling a house and buying a house at the same time, they may prefer to use one company to sign the paperwork for both transactions. Or if their buyer is moving from out of the area and is using a relocation company that insists on a title company that isn’t local, they often choose to go with another company.
“The sellers will say, ‘I don’t want to use some settlement company in Richmond. I want to use my local person,’ ” said Derrick Swaak, managing broker of the McLean Office of TTR Sotheby’s International Realty.
Genevieve Concannon, founder and broker of AdvonRE in Falls Church, Va., says sellers who have established a connection with a title company often prefer to remain with the same company. Maybe they refinanced their mortgage with them or used them in the past when buying the home. They have a certain comfort level with the company.
“Relationships really do matter,” she said. The sellers “feel like they are going to get better service and have a more streamlined process.”
Tracy Comstock, principal broker at SilverLine Realty & Investment, works with many international clients who prefer to use companies they know. They will tell her, “I’ve never heard of that [title] company. I’m not going to deal with it.”
Concannon recently had a situation in which she and her seller had a property go under contract. They utilized the title company the buyer chose to complete the sale. But after most of the work had been done, the sale fell through. Now that the property is back under contract, they are continuing to work with the original title company even though the buyer has chosen a different company.
“We are being loyal to the people who have done all this work,” she said.
Swaak noted that the price of a home can often lead to split closings.
“Particularly if it’s a more expensive house, it’s a more unusual transaction, the buyer and seller might want their own representation,” he said. “Because when you have one settlement attorney in the middle, they can’t represent either side because they are representing the transaction. They are a neutral party.”
While many see advantages to split closings, others see unnecessary delays and expenses.
“The title is the title,” Aparo said. “You’re going to get the same title report from the sellers’ side that you are going to get from the buyers’ side. It’s going to be the exact same thing. In my opinion, why is a seller paying for that? But there are title companies that are making money off of that.”
The buyers’ title company is responsible for making sure the title is clean, resolving any title issues, issuing title insurance, disbursing funds and releasing the mortgage lien. That doesn’t leave much for a sellers’ title company to do. But despite playing a limited role in the transaction, the sellers’ title company often charges a significant fee for its services.
Joe Gentile of Federal Title & Escrow wrote about the difference in fees in a 2014 blog post. He looked at three transactions, comparing what the fee would have been had a seller used the same title company as the buyer. He found that in split closings sellers paid between $270 to $335 extra to use a separate title company.
Gentile also noted that only one of the three closings went smoothly. Another criticism of split closings is the potential for delay. Because the paperwork has to shuttle from one title company to another, it adds a possible complication to the transaction. This is particularly problematic in Virginia. Unlike in Maryland and the District where a title company can disburse funds before recording the documents, Virginia requires the documents be recorded before funds are disbursed.
“It can potentially hold up the recording for a day or so which would hold up the proceeds that go to the seller,” Mullin said. “In this day and age, I don’t see the value in it for the seller.”
Oddly, split closings happen most frequently in Virginia. Mullin, whose company does business in the District, Maryland and Virginia, says he can’t recall any split closings in Maryland or the District, only Virginia.
“We found this to be a Northern Virginia phenomenon,” he said.
Asked why split closing seemed to be happening just in this one state, Mullin said, “I think there were a few [real estate] agents and companies there that started pushing the idea a few years ago to try to capture more business, particularly when business levels weren’t as great as they are now. They’re looking for ways to generate more revenue.”
While some see split closings as a waste of time and money, others defend their usefulness. But as Swaak points out, it’s the sellers’ choice whether it makes sense for them or not.
“The reality is it’s not terrible and it’s not up to [real estate agents],” he said. “It’s up to our clients, if they feel they want their own representation.”